Gold plunges to 6-month lows after Fed’s decision to taper

Gold plunged to nearly 6-month lows on Thursday, following Feds decision to cut its monthly bond purchases on brightened outlook for the US jobs market. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were further reduced and remained at the lowest since January 2009, adding to bearish sentiment. A stronger US dollar put more pressure on the yellow metal.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February declined by 2.45% to trade at $1 204.70 per troy ounce by 09:01 GMT. Prices touched $1 199.90 per troy ounce, the lowest since June 28th, when prices bottomed at $1 180.35 per troy ounce. Days high stood at $1 226.00 an ounce. The precious metal settled last week 0.8% higher, after declining 1.8% in the preceding 5-day period. Last month, gold plunged 5.5 percent, the most since June and the biggest drop in November since 1978.

The precious metal has fallen 27% so far this year and is heading for the first annual drop in 13 years as investors lost faith in it as a store of value amid a rally in U.S. equities to a record and muted inflation.

Fed stimulus outlook

The Fed reduced the pace of its monthly asset purchases to $75 billion from $85 billion, on its two-day policy meeting, concluded on Wednesday.

“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,” Bernanke said at a press conference in Washington after a meeting of the Federal Open Market Committee, cited by Bloomberg.

Fed Chairman Ben Bernanke announced that the central bank purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds starting from the beginning of 2014.

Only 34% of economists participated in a Bloomberg survey on December 6th, predicted that the Federal Reserve will scale back its $85 billion in monthly asset purchases this month, while the rest expected a Fed tapering in January or March.

Following the announcement of Feds decision, the US dollar strengthened and pressured the metal further. The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, added 0.06% to trade at 80.67 by 08:10 GMT. The March contract held in a day’s range between 80.80 and 80.63. The U.S dollar index settled last week 0.06% lower, after declining 0.52% in the preceding 5-day period. Strengthening of the dollar makes commodities priced in it more expensive for foreign currency holders and limits their appeal as an alternative investment.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were reduced to 812.62 tons on Wednesday, the lowest since January 2009. The fund has not seen inflows in more than a month, hinting that a substantial increase in prices is unlikely.

Outflows have totaled nearly 490 tons this year. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients on November 20 that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate. US inflation is still well below the Fed target of 2.00%.